Ross Textiles wishes to measure its cost of common stock equity. The firm\'s sto
ID: 2761356 • Letter: R
Question
Ross Textiles wishes to measure its cost of common stock equity. The firm's stock is currently selling for $38.34. The firm expects to pay a $3.46 dividend at the end of the year (2016). The dividends for the past 5 years are shown in the following table:
a. The growth rate of dividends from 2011 to 2015 is:__________
b. The nets proceeds are given as:__________
c. The cost of retained earnings is:__________
d. The cost of the new issue of common stock is:___________
Year 2015 2014 2013 2012 2011 Dividend per Share $3.11 $2.72 $2.46 $2.17 $2.04 5Explanation / Answer
a. The growth rate of dividends from 2011 to 2015 is:
FV = PV(1+r)n FV(terminal value) =$3.11, PV(Initial value) =$2.04, N = 4 (2015-2011)
$3.11=$2.04(1+r)4
r = ($3.11-$2.04)1/4 - 1
By solving the equation we ger r = 11.12%
b. The nets proceeds are given as $35.66 per share given in comment.
c. The cost of retained earnings is 20.14%
Using the constant growth variation model Rr = (Next dividend/current market price ) + growth rate
Rr= $3.46/$38.34 +0.1112
=0.0902+0.1112
=0.2014 or 20.14%
d. The cost of the new issue of common stock is 20.82%
Using the constant growth variation model cost of the new issue = (Next dividend/current market price ) + growth rate
= $3.46/$35.66 +0.1112
=0.0970+0.1112
=0.2082 or 20.82%
0
Year Dividend$ 2015 3.11 2014 2.72 2013 2.46 2012 2.17 2011 2.04Related Questions
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